The Final Countdown: Changes to Discovery Rules (and more!) Await Litigants Starting Next Month

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As litigants turn the calendar on June, significant new rules await for cases filed after July 1, 2018. Rather than take its cues from the Wisconsin Supreme Court, which traditionally governed procedural rules, the Legislature enacted substantial changes to Wisconsin’s laws on discovery. In 2017 WI Act 235, the Legislature implemented many new rules covered below that will affect civil procedure in Wisconsin.

New Limitations on Interrogatories and Depositions

The changes in Act 235 are highlighted by new limitations on interrogatories and depositions. Unless otherwise stipulated or ordered by the Court, parties are now limited to the following:

  • 25 interrogatory requests, including all subparts. Wis. Stat. § 804.08(1)(am).
  • 10 depositions, none of which may exceed seven hours in duration. Wis. Stat. § 804.045.

As in the Federal Rules, there remains no limit on the number of document requests that can be made. However, unlike the Federal Rules, Act 235 creates new limitations on requests for certain electronically stored information (ESI) as explained below.

In another noticeable departure from the Federal Rules, Act 235 does not require initial disclosures like those mandated by Fed. Rule Civ. Proc. 26(a)(1). The initial disclosures under the Federal Rules help alleviate the need for discovery in light of the limits on interrogatories, but Act 235 provides no such requirement for the parties to identify individuals likely to have discoverable information, the categories of documents that support a claim or defense, a computation of damages, or any insurance agreements that may be available to satisfy a judgment. 

These changes will likely increase motion practice (requesting and/or opposing additional discovery) and demand more active court management.

Automatic Stay on Discovery

Act 235 creates a new provision that stays all discovery requests upon the filing of a motion to dismiss, a motion for judgment on the pleadings, or a motion for a more definite statement, “unless the court finds good cause upon the motion of any party that particularized discovery is necessary.” The stay applies for the shorter of 180 days or until the court rules on the motion. Wis. Stat. § 802.06(1)(b). By comparison, the Federal Rules permit discovery once the parties have a scheduling meet and confer conference under Rule 26(f) and otherwise provide no automatic stay.

Proportionality

Act 235 removes the “reasonably calculated” language that previously framed Wisconsin’s scope of discovery. In its place, the Act adds a “proportionality” standard borrowed from the Federal Rules. Wis. Stat. § 804.01(2)(a). Parties may still obtain discovery concerning non-privileged matters relevant to the party’s claims or defenses, but now discovery requests must be proportional to the needs of the case. Courts must consider the following when weighing “proportionality”:

  • The importance of the issues at stake in the action;
  • The amount in controversy;
  • The parties’ relative access to relevant information;
  • The parties’ resources;
  • The importance of the discovery in resolving the issues; and
  • Whether the burden or expense of the proposed discovery outweighs its likely benefit.

Although early in its development under the Federal Rules, the proportionality test appears to have resulted in the federal courts taking a more proactive role in managing or tailoring discovery requests. See, e.g., O’Boyle v. GC Servs. Ltd. P’ship, No. 16-C-1384, 2018WL2271033, at * 5 (E.D. Wis. May 17, 2018) (denying motion to compel because requests are not “proportional to the needs of the case”).

New Limitations on ESI

Act 235 creates new rules related to electronically stored information (“ESI”) by requiring “substantial need” and “good cause” to request the following information:

  • Data that cannot be retrieved without substantial additional programming or without transforming it into another form before search and retrieval can be achieved;
  • Backup data substantially duplicative of more accessible data;
  • Legacy data remaining from obsolete systems; or
  • Data not available to the producing party in the ordinary course of business and not reasonably accessible because of burden or cost.

These new rules depart from the Federal Rules by carving out particular categories of ESI subject to the “substantial need” and “good cause” standard. Wis. Stat. § 804.01(2)(e)1g. In light of the already frequent fights over ESI, this new standard could significantly alter the playing field in discovery disputes—especially when only one party holds significant ESI and there is less incentive to be reciprocally reasonable with respect to discovery responses.

Act 235 also limits requests for any document within five years of the accrual of the cause of action; this limit does not apply to health care, vocational, or educational records. Finally, parties should also be aware of the existing requirement that parties confer before requesting any ESI. Wis. Stat. § 804.01(2)(e)1r.

New Standards for Protective Orders

Act 235 includes provision that the court “shall” limit discovery if either:

  • The discovery sought is cumulative or duplicative, can be obtained from another source that is more convenient, less burdensome, or less expensive; or
  • The burden or expense of the proposed discovery outweighs its likely benefit or is not proportional to the claims and defenses at issue.

Interestingly, the standard for a protective order—Wis. Stat. § 804.01(2)(am)2—does not exactly mirror the “proportionality” test found in the new scope of discovery. Wis. Stat. § 804.01(2)(a). Among other differences, the standard for granting a protective order omits the “parties’ relative access to relevant information” as a consideration that is found under the “proportionality” test. Neither Act 235 nor legislative history appears to explain this discrepancy. It will remain to be seen if the courts apply these standards differently as a result.

Finally, like the Federal Rules, the new rules permit the court to allocate discovery expenses among the parties.

Amendments to Class Certification Rules

Act 235 authorizes an appeal as a matter of right from the circuit court’s class certification decision. The Act also requires detailed reasoning for the benefit of the appellate court and automatically stays all proceedings until the appellate decision. These changes come in conjunction with the Wisconsin Supreme Court’s recent adoption of changes to conform Wisconsin class action law to the requirements of Federal Rule 23.

Revisions to Statute of Limitations / Repose Periods

Act 235 shortens the Statute of Limitations from six years to three for:

  • Statutory claims (unless otherwise specified) (Wis. Stat. § 893.93(1m));
  • Injury to character, or rights of another (Wis. Stat. § 893.53); and
  • Certain claims by franchised motor vehicle dealers (Wis. Stat. § 218.0125).

Perhaps more significantly, Act 235 shortens the repose periods for personal injury claims following construction. Wis. Stat. § 893.89. Here, the Act shortens the period from ten years to seven years. Practitioners should take particular notice because this change took immediate effect on April 5, 2018. This change may result in litigation regarding whether the Act intended this change to have retroactive effect. See Gutter v. Seamandel, 103 Wis. 2d 1, 308 N.W.2d 403 (1981) (declining to apply a new statute of limitations to causes of actions accruing prior to the effective date of the new statute of limitation absent express language in the statute imposing retroactive effect).

Other significant changes

Under state law, unless otherwise provided by law, an insurer must pay insurance claims within 30 days after the insurer is furnished written notice of the fact of a covered loss and loss amount. Under prior law, overdue payments must bear simple interest at the rate of 12% per year. Wis. Stat. § 628.46(1). The Act changes the interest rate applicable to overdue payments to 7.5% per year (by comparison, offers of settlement accrue prime rate plus 1%—currently 4.5% per year. Wis. Stat. § 807.01).

Act 235 creates novel mandatory disclosures for a party to provide any agreement in which any person has a right to receive compensation contingent upon the proceeds of the civil action (this requirement does not apply to attorneys’ contingent fee representations).

Finally, Act 235 also limits the Secretary of Revenue from using third-party contingent agreements to enforce the Uniform Unclaimed Property Act.

Conclusion

Although some of the discovery provisions are already in effect (noticeably, the “proportionality” test that already exists in federal courts), the demarcation for most of Act 235’s changes is for cases filed after July 1, 2018. The Act creates new battlefronts on whether discovery is proportional, ESI is reasonably accessible, and the likely benefit of discovery justifies its costs. Forewarned of these changes, parties can proceed accordingly.

Wis. Supreme Court Narrows Fraudulent-Transfer Exception, Suggests Stringent Pleading Requirements

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Generally, companies purchasing the assets of another company are not responsible for the seller’s liabilities. One long-established, but poorly defined, exception applies when the assets are transferred fraudulently in an effort to evade liabilities. In Springer v. Nohl Electric Products Corp., the Wisconsin Supreme Court took a step towards clarifying (and perhaps limiting) this fraudulent-transfer exception, over the dissent of Justice Abrahamson.

While the majority opinion focused on the legal issue presented in the case—the proper legal standard for fraudulent transfer exception—Justice Abrahamson’s dissent was most concerned with the outcome of the litigation and its broader implications for due process.

In a 5-2 decision, the Court held that the Wisconsin Uniform Fraudulent Transfer Act (“WUFTA”), in chapter 242 of the Wisconsin Statutes, does not define the scope of the fraudulent-transfer exception to successor non-liability under common law. The Court additionally decided that summary judgment was appropriate because the plaintiff’s complaint did not clearly allege that the defendants were liable under a successor-liability theory. Justice Abrahamson dissented, briefly arguing that WUFTA should play a role in the fraudulent-transfer analysis, but focusing primarily on the Court’s decision to dismiss the case. She argued that even addressing an issue with the pleadings was inappropriate because the issue was not raised by the defendants and plaintiff had no opportunity to be heard on that issue.

Brief Background

Springer involved negligence and strict-liability claims against several companies for creating, distributing, and selling asbestos products. The complaint named Fire Brick Engineers Company, Inc. (“FBE2”) and its successor, Powers Holdings, Inc., as defendants. FBE2 was formed in the 1980s to purchase the assets of Fire Brick Engineers Company (“FBE1”), a company formed in the 1940s to manufacture and distribute asbestos products. FBE2 later merged with another company to form Powers.

After initially allowing the claims to continue to discovery, the trial court granted the defendants’ motion for summary judgment, holding that FBE2 (now Powers) could not be liable because it was formed more than a decade after the plaintiff’s husband was exposed to asbestos. In response, Springer argued that there was a factual dispute about whether FBE2 (and thus Powers) could be held liable under the fraudulent-transfer exception to successor non-liability because a number of circumstances surrounding the sale indicated a possible fraudulent intent. These included the fact that a FBE2 shareholder was aware of FBE1’s potential liabilities, several FBE2 shareholders acted as attorneys for FBE1, and FBE1’s assets were sold for inadequate consideration, without appraisal or negotiation.

Springer appealed to the Wisconsin Court of Appeals, which reversed, finding that WUFTA should govern the fraudulent-transfer exception and that the evidence showed there was a genuine issue of material fact as to whether the transfer from FBE1 to FBE2 triggered the fraudulent-transfer exception. Powers then successfully petitioned the Wisconsin Supreme Court for review.

Fraudulent Transfer Exception and WUFTA

The Wisconsin Supreme Court reversed, holding that WUFTA does not apply to the common law fraudulent-transfer exception. The Court pointed out that successor non-liability and its exceptions arose out of the American and English common law. On the other hand, WUFTA “exists independently from this common law history” and is focused not on holding successor entities responsible for their predecessors’ obligations, but on helping creditors collect claims which “may be frustrated by recent asset transfers.” 2018 WI 48, ¶27. After surveying a number of common law sources, the Court found WUFTA’s standard inapplicable to claims of fraudulent transfer regarding successor liability. Justice Abrahamson disagreed, stating that WUFTA should be a source of guidance for courts in identifying “indicia of fraud” for purposes of the fraudulent-transfer exception.

Summary Judgment and Justice Abrahamson’s Dissent

After determining that WUFTA does not govern the fraudulent transfer exception, the Court turned its attention to the procedural posture of the case. The Court noted that while Springer argued for successor liability in response to a motion for summary judgment, she never amended her complaint to allege successor liability. Evaluating the sufficiency of the pleadings, the majority found that Springer’s pleadings failed to “allege facts that plausibly suggest [she was] entitled to relief” against Powers and therefore affirmed the trial court’s order of summary judgment dismissing Powers.

Justice Abrahamson stridently disagreed with the Court’s decision to review the pleadings, noting that the defendants never challenged the sufficiency of the pleadings at any stage of litigation, including before the Wisconsin Supreme Court. Justice Abrahamson insisted that the issue of the sufficiency of the pleadings was not “properly before this court.” Id., ¶49 (Abrahamson, J., dissenting). She was particularly troubled by the fact that the parties were not given notice that the Court “[was] concerned about these issues” and were therefore given no opportunity to address them. Id. Pointing to two recent cases, Justice Abrahamson lamented what she described as “the court’s growing bad habit of addressing issues without giving parties notice and the opportunity to address the issue . . . .” Id., ¶52. She voiced a concern that this trend might violate due process, which “requires (at a minimum) notice and an opportunity to be heard.” Id., ¶51.

Take-Away

Springer makes clear that the fraudulent-transfer exception to successor non-liability is rather narrow. It is also serves as a startling reminder of increasingly demanding pleading standards. The long-established flexibility of notice pleading was somewhat curtailed by the U.S. Supreme Court’s Twombly and Iqbal decisions a decade ago, and the Wisconsin Supreme Court has largely followed suit. Springer reminds litigants to take care to amend or seek leave to amend pleadings as part of the defense of a summary judgment motion, even when that motion does not expressly attack the sufficiency of the initial pleading.

Law Clerk Collin Weyers assisted with researching and writing this post.

Court of Appeals Reverses Agency Prohibition on Strip Searches at Juvenile Residential Care Centers

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In Milwaukee Academy v. Department of Children and Families, 2016 AP 2377, the Wisconsin Court of Appeals faced the question of whether residential care centers for minors are prohibited from ever strip-searching residents. The Court concluded that state law does not contain a blanket prohibition against strip searches in all circumstances.

The specific strip search at issue before the court took place at Milwaukee Academy, a DCF-licensed residential care center for girls ages ten through seventeen. The children placed at Milwaukee Academy include victims of sexual abuse, subjects of CHIPS cases (where children and parents are subject to court supervision due to findings related to abuse or neglect), children experiencing emotional and behavioral disorders who need respite care, and children who have been adjudicated delinquent. 

The subject of the search is identified only as J. The record is silent regarding the nature of her placement at Milwaukee Academy. After she cut her arms with pieces of plastic, J had been taken to the Milwaukee Mental Health Center.  When J returned to Milwaukee Academy, she refused to cooperate or answer questions about whether she had any weapons. J was taken to the “time out room” with four female staff members present. After J kicked one staff member in the head, the staff took her to the floor using a “team lateral restraint.”

Milwaukee Academy acknowledged that J was forcibly searched and her clothing was cut off. According to an internal investigation , “[s]taff were able to complete the body search but due to J’s continued attempt to kick, bite, scratch and pinch, the nurse had to cut off her bras (she had two of them on) and shirt, and removed her pants.” After the search, Milwaukee Academy staff called for assistance from sheriff’s deputies, who took J to the hospital and then to jail.

Milwaukee Academy subsequently prepared and filed a “Serious Incident Report,” as required by DCF regulations. DCF then imposed a forfeiture on Milwaukee Academy, stating that the relevant statutes and code sections impose an absolute prohibition against strip searches in a residential care center for minors. Milwaukee Academy’s administrative challenge to the forfeiture failed, as the Division of Hearings and Appeals concluded that the strip search had violated J’s rights under state law.  

Milwaukee Academy petitioned for review in circuit court. The circuit court concluded that, under the relevant statutes, minors in residential care centers have right comparable to those granted to patients under state law. According to the circuit court, those rights do not include an absolute right to be free from strip searches. As the circuit court explained, “[d]epending on the security needs and other circumstances of each kind of facility, [an RCC] resident’s right to be free from strip searches might be as limited as an inpatient’s.”

On appeal, DCF argued that, as a matter of law, strip-searching an RCC resident is never permissible. DCF based its argument on Wis. Admin. Code § DCF 52.31(1)(a), which cross-references Wis. Admin. Code ch. DHS 94, and Wis. Stat. § 51.61. Because this was an appeal of an administrative decision, the Court of Appeals reviewed the agency action, not the circuit court’s analysis, and it afforded due-weight deference, under which the agency’s legal interpretation is sustained unless there is a more reasonable interpretation.

Ultimately, the Court of Appeals came reached the same result as the circuit court. It held that DCF’s interpretation—based on a distinction between a “patient” and an “inpatient”—lacked textual support in the statutes and regulations. Those sources, the Court determined, do not distinguish between “patient” and “inpatient” but use those terms interchangeably. As an example, the Court focused on the administrative code section that DCF cited, finding “no clear or meaningful distinction between the rights of a ‘patient’ and an ‘inpatient’ in § DHS 94.24(2)(d), contrary to DCF’s argument.” Slip op., ¶26.

The Court of Appeals held that the plain text of the relevant statutes and regulations led to a conclusion more reasonable than that reached by DCF: there is nothing in the DCF regulations that prohibits a strip search of an RCC resident in all circumstances. Instead, such searches are limited by the framework contained in § DHS 94.24(2)(d). Because the Courtdeemed the record insufficient to apply the governing regulations to this particular search,  it remanded the case to DCF for further proceedings.

While it is too early to know how Milwaukee Academy’s strip search of J will be adjudicated, this case may have a significant effect on juveniles’ out-of-home placements moving forward. It remains to be seen if courts will be more hesitant to place certain juveniles in RCCs, even when the juveniles need services that cannot be managed exclusively by the Department of Children and Families.

New Technologies Will Present New “Walking Quorum” Challenges for Governmental Bodies

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A “walking quorum” is a series of gatherings among separate groups of members of a governmental body, each less than quorum size, who agree, tacitly or explicitly, to act uniformly in sufficient number to reach a quorum. Recognizing that a walking quorum may produce a predetermined outcome and deprive the public the opportunity to observe the decision making process, Wisconsin courts have long warned public officials that any attempt to circumvent a public meeting through use of a walking quorum is subject to prosecution under the Open Meetings Act. See e.g., State ex rel. Newspapers v. Showers, 135 Wis.2d 77, 398 N.W. N.W.2d 154 (1987).

In State ex rel. Zecchino v. Dane County (February 27, 2018), the Court of Appeals (District IV) considered an Open Meetings Act claim based on a series of email messages between Dane County Board Supervisor Paul Rusk and no more than eight of his fellow supervisors prior to a controversial vote on the renewal of a billboard lease. The plaintiffs argued that the emails suggested the effort to assemble a walking quorum in violation of the Open Meetings Act, such that he should be allowed discovery to ascertain the full extent of informal communications.

The Court of Appeals dismissed the complaint for failure to state a claim. The Court first determined that the emails Zecchino already had did not indicate a “tacit agreement” between the defendants to vote against the lease. One of the emails dealt with a scheduling matter, while others asked supervisors for their opinion or expressed Rusk’s personal position. The Court also found that because the quorum of the Board on the day of the vote was eighteen, Rusk’s communications with eight supervisors could not establish a walking quorum. The court confronted the walking quorum prohibition in the context of email messages. Applying the walking quorum concept in light of newer technologies will raise new issues for Wisconsin governmental bodies. Today, members of governmental bodies can communicate using a wide variety of real-time communications platforms. Along with email, public officials can chat through tweets, Gchat, Yik Yak, Snapchat, Facebook, Instagram, Viber, Skype, HipChat, FireChat, Cryptocat, What’s App, and, of course, text messaging. Stafford Rosenbaum LLP’s Municipal Law team works with governmental bodies to navigate the challenges that new technologies present in complying with the Wisconsin Open Meetings Law.

Seventh Circuit Predicts That Wisconsin Will Adopt Learned Intermediary Doctrine

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The Seventh Circuit recently addressed an open issue under Wisconsin products liability law—do manufacturers of prescription drugs or medical devices satisfy their duty to warn of product risks by informing prescribing physicians (rather than the patients themselves) of those risks?  In In re: Zimmer, NextGen Knee Implant Products Liability Litigation, No. 16-3957 (7th Cir. Mar. 8, 2018), the federal appeals court predicted that the Wisconsin Supreme Court likely would answer “yes” to that question by adopting the “learned intermediary doctrine.”

At issue in this case was a knee implant manufactured by Zimmer NexGen Flex, an entity that has been subject to numerous complaints from patients alleging that their implants are subject to premature loosening.  The claimant in this particular case, Theodore Joas, is a patient who had knee-replacement surgery in Eau Claire in 2008 and filed suit against Zimmer after beginning to feel pain in his new knee in 2011.

Due to the number of similar claims against Zimmer, all litigation involving the Zimmer knee implants, including Mr. Joas’ lawsuit, were transferred to a multidistrict proceeding pending in the Northern District of Illinois.  The judge in the multidistrict proceeding subsequently selected Mr. Joas’ suit as a bellwether—a test case—and scheduled his claim to move forward.

Prior to trial, Zimmer moved for summary judgment on all of Mr. Joas’ claims.  Zimmer argued that the testimony of Joas’ only medical expert must be excluded as unreliable. The doctor’s report applied a differential etiology method that identified the most likely cause of Joas’ injury by eliminating other potential causes. But the medical expert could not affirmatively prove a specific cause for the loosening. The judge excluded the doctor’s opinion under the Daubert standard as lacking any discernable basis for concluding which potential causes were reasonable.  The judge then granted Zimmer’s summary judgment motion, holding that, absent expert medical testimony, the factual record did not support Joas’ causation theories.  Slip. op. at pp. 3-4.

Rather than challenge the Daubert ruling, Joas argued on appeal that, even without his own medical expert's testimony, he could win by proving that Zimmer failed to adequately warn both himself and his doctor of the risks associated with the knee implants. Joas supported his positions with testimony from one of Zimmer’s experts, who opined that it would take two bags of cement to properly bond the knee implant to a patient’s shinbone.  Because his doctor used only one bag, Joas theorized that Zimmer failed to satisfy its duty to warn that two bags of cement were needed to properly bond the implant.  Id. p. 4.

The Seventh Circuit rejected this argument on a number of grounds.  With respect to Zimmer’s duty to warn Joas directly, the Seventh Circuit noted that this was an issue of first impression under Wisconsin law.  The Court noted, however, that the overwhelming majority of courts from other jurisdictions facing this issue have adopted the “learned intermediary doctrine,” which states that medical device manufacturers satisfy their duty to warn of product risks by informing the prescribing physicians of those risks.  The Court predicted that Wisconsin would follow suit. It reasoned that the doctrine recognizes the practical reality that patients cannot obtain such devices without physician intervention and that patients reasonably rely on their physicians to warn them of the risks associated with medical procedures.  Id. pp. 5-8.

The Court also noted that Joas’ argument suffered from a lack of evidence to establish causation.  A warning directly to Joas would not have changed the outcome given that it was his physician (rather than Joas himself) who selected to use the Zimmer brand of knee implant for his procedure.  Any warning directed towards Joas’ surgeon similarly would have failed to make a difference, as the surgeon testified that he performed the surgical cementing technique based on his medical fellowship and residency training and that he did not review Zimmer’s device instructions.  While Joas argued for a “heeding presumption” that would allow for a factfinder to presume that a proper warning would have been read and followed by a medical professional, he cited no Wisconsin authority in support of this argument. The Court determined that such a presumption likely would not be adopted by Wisconsin courts.  Id. pp. 8-13.

While the Seventh Circuit’s decision is not a binding statement of Wisconsin law, Wisconsin courts will likely follow its well-reasoned analysis adopting and applying the “learned intermediary doctrine” to insulate medical device and pharmaceutical manufacturers from claims that they have a duty to warn patients directly.  Patients should also view In re: Zimmer, NextGen Knee Implant Products Liability Litigation as a warning that direct causal evidence likely will be needed to prevail on any liability claims against manufacturers of medical products

 

The NLRB Creates a New Standard for Evaluating Workplace Rules’ Effect on the Right to Unionize

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In The Boeing Company and Society of Professional Engineering Employees in Aerospace, IFPTE Local 2001 the National Labor Relations Board (NLRB) articulated a new standard for determining whether employers’ rules and handbook provisions violate the National Labor Relations Act’s (NLRA) prohibition on rules that interfere with employees’ right to join labor organizations and bargain collectively. Cases 19-CA-09032, 19-CA-090948, and 19-CA-095926. The NLRB believes that this new standard will be easier to apply on a case-by-case basis, and will invalidate fewer “common-sense rules and requirements that most people would reasonably expect every employer to maintain.”

Background

In The Boeing Company, Boeing had a policy that banned the use of “devices to capture images or video” without a valid business need and camera permit (No-Camera Rule). The No-Camera Rule prohibited only the use of the camera–not the entire device–therefore employees were allowed to use cellphones and laptops on company property. The question before the Board was whether the No-Camera Rule violated the NLRA’s prohibition against employers interfering with employees’ right to unionize.

Section 7 of the NLRA guarantees employees the right to self-organize and join labor organizations. Section 8(a)(1) makes it an unfair labor practice for an employer to interfere with that right. Under prior law, if a rule did not explicitly interfere with employees’ right to unionize, the NLRB would consider whether: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights. Lutheran Heritage Village-Livonia, Case 7-CA-44877 (emphasis added). The administrative judge held that Boeing’s No- Camera Rule was unlawful because it failed prong (1) of the test; that is, employees would “reasonably construe” the rule to prohibit Section 7 activity.

NLRB Decision

The NLRB overruled the “reasonably construe” standard iterated in Lutheran Heritage and held that, under its new test, the No-Camera Rule was lawful. The NLRB listed many reasons why the test was insufficient. Among those reasons, was that the “reasonably construe” test “entails a single-minded consideration” in that it does not consider justifications for having the employer’s rule in place. The NLRB noted that the test created confusion for employers because outcomes were unpredictable, and that the test was based on the false premises that employees are best served by not having employment policies.

Under the NLRB’s new test, the first question is whether the rule would potentially interfere with the exercise of NLRA rights. If not, then the rule is lawful. If yes, then the NLRB considers (1) the nature and extent of the potential impact on NLRA rights, and (2) legitimate justifications associated with the rule. Then the NLRB will classify the rules it evaluates under this new standard into one of the three categories. Category 1 includes rules that are lawful because they don’t interfere with NLRA rights or the potential adverse impact on rights is outweighed by the rule’s justification. Category 2 includes rules that warrant individualized scrutiny in each case as to whether the rule would prohibit or interfere with NLRA rights, and if so, whether any adverse impact is outweighed by justifications. Finally, Category 3 includes rules that the NLRB designates as unlawful because they violate NLRA-protected conduct and are not properly justified.

As for Boeing, the NLRB determined that the No-Camera Rule fell under Category 1 because it only had a slight adverse impact on Section 7 activity and Boeing had legitimate justifications for the rule. Boeing has highly sensitive and classified information because it manufactures military aircrafts for the federal government.

Take-Away

The NLRB’s ruling affects union and non-union workplaces because non-union workplaces must also comply with the provisions in the NLRA prohibiting interference or restraint on collective bargaining and self-organizing. Therefore the ruling has a widespread impact. The new test is more employer friendly in that it gives weight to the reasoning behind implementing a workplace rule or policy.  Additionally, the categorization scheme should provide employers with more guidance in creating lawful work policies.

The case is available at: https://dlbjbjzgnk95t.cloudfront.net/0995000/995170/decision.pdf

Seventh Circuit Holds Pharmaceutical Product Liability Claims Preempted By Federal Law

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The Seventh Circuit Court of Appeals held on January 19, 2018, that federal law preempts thousands of product liability claims, brought under the laws of various states, concerning Depo-T (a testosterone drug). Guilbeau v. Pfizer Inc., No. 17-2056 (7th Cir.). The case illuminates the intersection of tort law, federal regulation, and intellectual property.

Generally, a new drug must undergo a rigorous “new drug application” (NDA) process before the Food and Drug Administration will approve them for public use. The NDA process includes a laborious review to determine a drug’s safety and efficacy. If approved, a drug that has gone through the NDA process is considered a brand name drug and any drug made thereafter of the same composition will be considered a generic drug. The distinction between brand name and generic drugs implicates intellectual property rights, pricing, and obligations with respect to labeling.

If a second drug is considered to be the same as or bioequivalent to a drug approved through the NDA process, that second drug may be reviewed by the FDA under the “abbreviated new drug application” (ANDA) process. A drug approved through the ANDA process is generally considered a generic drug. However, in certain circumstances, a drug approved through the ANDA process is deemed to be the reference-listed drug (that is, the first drug of that physical composition to be approved by the FDA), and is therefore considered a brand name drug.

This case fell into those unusual circumstances. In 1953, Delatestryl (a testosterone replacement drug) was approved as a new drug by the Food and Drug Administration after NDA review. Then, in 1979, Depo-T was found to be the same as Delatestryl and was approved through the ANDA process. However, because Depo-T was slightly different in physical composition to Delatestryl, the FDA deemed it a separate reference-listed drug. Depo-T therefore became the brand-name drug for any later generic versions using its particular formulation.

In 2014, more than a thousand plaintiffs filed suit in several states, alleging that, after taking Depo-T as prescribed, they suffered heart attacks or strokes. The plaintiffs sued Pfizer, Inc. (the drug’s manufacturer), under the theory that the company failed to warn physicians and patients of the drug’s potentially fatal side effects. After those cases were consolidated and the district court concluded that the plaintiffs’ state-law claims were preempted by federal law, the plaintiffs appealed.

The Seventh Circuit held that Depo-T’s classification as a brand name drug was less important than its regulatory approval under the ANDA process. The plaintiffs argued that, because Depo-T is a reference-listed drug, Pfizer had a duty to warn prescribers and patients of any dangers and should, therefore, have updated its labels explaining the risks of heart attack and stroke as those risks were discovered. The court disagreed. Because Depo-T was approved under an ANDA, it was to be treated legally as if it were a generic drug.

Generic drugs are obligated to use a label that matches the one used by the corresponding brand name drug and cannot make changes absent FDA approval. As a result, manufacturers of generic drugs cannot be sued on the theory that their labels fail to contain information not included on the label of the corresponding brand name drug.

The Seventh Circuit cited the Supreme Court’s decision in Pliva, Inc. v. Mensing, 564 U.S. 604 (2011), which held that when federal drug regulations that apply to generic drugs conflict with state law claims, like failure to warn of adverse side effects, the state law is preempted. In other words, because Depo-T’s was approved through the ANDA process and its label conforms with what the FDA required, the state-law failure to warn state law claims against Pfizer are preempted by federal law. The court noted that the unusual fact of Depo-T being a reference listed drug while also having the legal status of a generic does not change the outcome here.

Laura Lamansky is a law student at the University of Wisconsin and a law clerk working under supervision. She will be a full-time lawyer at Stafford Rosenbaum beginning later this year.

APPEALS COURT CLARIFIES APPLICABILITY OF WORKER’S COMPENSATION STATUTE TO TEMPORARY EMPLOYEE CLAIMS

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In a recent decision, the Wisconsin Court of Appeals addressed the insurance implications of a car accident made unusual because at least two of the deceased workers were employees of temporary help agencies. See Ehr et al. v. West Bend Mutual Insurance Co. et al., Case No. 2017AP142 (Wis. Ct. App. January 9, 2018) [decision].  In so doing, the Court clarified that worker’s compensation laws—and particularly the exclusive-remedy provision that prevents injured employees from bringing tort suits against their employers—apply differently to temporary workers than to permanent employees.

The accident involved a vehicle owned by the temporary employer and occurred during work-related activities, which unfortunately resulted in the death of three individuals, at least two of which were temporary employees.  It’s the last of these circumstances that complicated matters.

One of the temporary employee’s estate and two surviving minor children filed a wrongful death action in Milwaukee County Circuit Court against Alpine Insulation, the temporary employer, and Alpine’s automobile liability insurer, West Bend Mutual Insurance Company. That suit sought damages for pain and suffering as well as the minor children’s loss of society, companionship, and support.  Id., ¶¶ 3-5.

After answering the complaint, Alpine and West Bend moved for summary judgment on the ground that the plaintiffs’ claims were barred by Section 102.29(6)(b)1 of the Wisconsin Worker’s Compensation statute, which states:

“[n]o employee of a temporary help agency who makes a claim for compensation may make a claim or maintain an action in tort against . . . any employer that compensates the temporary help agency for the employee’s services.”

According to Alpine and West Bend, the plaintiffs’ wrongful death tort claim was barred under this statute because the deceased had been employed by a temporary help agency and Alpine had compensated that agency for the deceased’s services.  As a result, the defendants argued that under Section 102.29(6)(b)1 the plaintiffs could not bring tort claims against Alpine as the deceased’s temporary employer.  The circuit court agreed and therefore granted summary judgment in favor of the defendants. Ehr slip op. ¶ 6.

The Wisconsin Court of Appeals reversed.  The Court noted that, by holding that Wis. Stat. 102.29(6)(b)1 completely bars tort claims a temporary employee may otherwise bring against its temporary employer under all circumstances, the circuit court ignored the qualifying phrase “who makes a claim for compensation.”  The Court held that the plain meaning of the statute governs, such that a temporary employee injured during the scope of his or her temporary employment may seek relief in either of two ways: (1) by making a worker’s compensation claim against his or her permanent employer (the temporary help agency) and be subject to the exclusive remedy provision or, alternatively, (2) by pursuing a third-party claim against his or her temporary employer and foregoing any claim under the worker’s compensation statute.  Id. ¶¶ 14-18.

The Court further rejected Alpine and West Bend’s argument that such an interpretation would unfairly place temporary employees in a more advantageous position than permanent employees.  The Court explained that the exclusive-remedy provision only limits permanent employees’ claims against their employers, and that such employees are free to pursue tort claims against third parties.  The exclusive-remedy provision, the Court continued, places the same limitation on temporary employees vis a vis their permanent employers (the temporary help agency).  The legislature’s adoption of Wis. Stat. § 102.29(6)(b)1 was a reasonable recognition of a “middle ground” for claims by a temporary employee against his or her temporary employer; rather than treat such entities as a truly independent third party and allow a temporary employee to pursue those tort claims in addition to a worker’s compensation claim against the temporary help agency, the temporary employee may only choose one avenue of recovery.  Id. ¶¶ 21-25.

An interesting factual wrinkle that was not explored in this decision is that the driver of the Alpine-owned vehicle was also a temporary Alpine employee, but had been hired through a different temporary help agency than the employee whose estate brought this lawsuit.  One wonders if the plaintiffs could have avoided any potential worker’s compensation statutory complications altogether by filing a claim against only West Bend under the theory that, as the insurer of the Alpine vehicle, West Bend was obligated to provide coverage for any liability arising from the negligent operation of that vehicle.  Additionally, given that the temporary workers were employed by different temporary help agencies, the plaintiffs presumably could have brought suit directly against the driver and possibly his personal auto liability insurer without implicating any potential worker’s compensation statutory limitations.

In any event, in light of the Ehr decision, Wisconsin employers should factor in their increased liability exposure when deciding whether to seek help on a temporary basis.  While it may be cost-effective to avoid taking on additional permanent employees in other areas of their business, the Ehr decision makes clear that businesses employing temporary workers are exposing themselves to additional liability exposure should a temporary employee be injured on the job.  At a minimum, Wisconsin businesses should ensure that all of their liability insurance provides adequate coverage for any potential tort claims brought by a temporary employee.

Court Determines Defendant’s Breach of Contract Constituted a “Wrongful Act”

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The Wisconsin Court of Appeals issued a decision that clarifies an exception to the general rule that attorneys’ fees are not recoverable damages. Talmer Bank & Trust v. Jacobsen, No. 2017AP752-FT (Wis. Ct. App. Jan. 10, 2018). The court held that a litigant may recover attorneys’ fees if he or she is forced into litigation with a third party because of another party’s breach of contract.

Background

The Gomezes entered into a land contract with the Jacobsens. The underling land was owned by the Jacobsens, subject to a mortgage. Pursuant to the contract, the Gomezes made monthly payments to the Jacobsens, and in turn the Jacobsens were supposed to continue making mortgage payments. Unbeknownst to the Gomezes, the Jacobsens missed fifteen consecutive monthly mortgage payments. Eventually the mortgage holder initiated a foreclosure action against both the Gomezes and the Jacobsens. The Gomezes reached a settlement with the bank that allowed them to stay on the property. The Gomezes then filed a cross-claim arguing that the Jacobsens must pay their attorneys’ fees that they incurred in defending the foreclosure action.

Generally in the United States, litigants may not recover attorneys’ fees as damages, but there are exceptions to this rule. The Gomezes invoked the “third-party litigation exception,” which states that a party may recover attorneys’ fees if another party’s wrongful act forces the individual into litigation. It was uncontested that the Jacobsens’ breach of the land contract forced the Gomezes into litigation with the bank, therefore the sole question before the circuit court was whether the Jacobsens’ breach constituted a wrongful act. The circuit court held that a breach could not constitute a wrongful act, and therefore the Jacobsens were not required to pay the Gomezes’ attorneys’ fees.

Court of Appeals’ Decision

On appeal, the Jacobsens argued that their breach of contract did not constitute a wrongful act because a wrongful act is limited to fraud, breach of a fiduciary duty, or “something similar.” The court of appeals rejected this argument. “Our supreme court has unequivocally declared that ‘a breach of contract as well as tort may be a basis for allowing [a] plaintiff to recover reasonable third-party litigation expenses.” ¶ 10 (quoting City of Cedarburg Light & Water Comm’n  v. Glens Falls Ins. Co., 42 Wis.2d 120, 166 N.W.2d 165 (1969)). The court explained that attorneys’ fees are recoverable when such fees are rightly considered part of the damages flowing from the defendant’s breach of contract.

The court’s decision makes clear that when a party’s breach of contract forces someone else into litigation with a third party, such breach is a wrongful action, which permits the individual to recover his or her attorneys’ fees from the breaching party.

Court Distinguishes Employers Ability to Recoup Draws on Commission

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The Sixth Circuit Court of Appeals recently issued a decision holding that hhgregg Inc.’s practice of paying at least minimum wage to commissioned employees when earned commissions fell short of minimum wage during a given pay period, and then later deducting that amount if the employee made more than minimum wage in the future, did not violate the Fair Labor Standards Act (FLSA). Stein v. HHGregg, Inc., 873 F.3d 523 (6th Cir. 2017). The Sixth Circuit’s jurisdiction extends to Tennessee, Kentucky, Michigan, and Ohio. Wisconsin businesses are not directly affected by the outcome of this case, but the circuit’s decision is informative.

Background

Hhgregg’s retail employees are paid on commission. If the employees do not sell enough products to meet minimum-wage requirements in a given week, then hhgregg advances a “draw” to the employees to bring their wages up to minimum wage. If an employee later makes more than minimum-wage in a work week, then hhgregg will deduct the amount of previous draws from the employee’s paycheck. Current and former employees sued hhgregg claiming that the recoupment of draw advances from later paychecks violated the FLSA. Specifically, the plaintiffs argued that hhgregg’s policy violated the requirement that minimum wage be paid “finally and unconditionally or ‘free and clear.’” 29 C.F.R. § 531.35. That is, the employees claimed that this scheme resulted in an unlawful “kick back” of wages.

The Court’s Decision

The court concluded that recouping draws from later paychecks does not constitute an unlawful kick-back. The court explained that the regulations prohibit employers from demanding that employees return wages already delivered. However, the court held that hhgregg’s practice did not violate the anti-kick back FLSA regulations because hhgregg employees keep all draws received from the company in the paycheck in which the draw is received. If and when the employee makes more than minimum wage, hhgregg deducts draws from wages before they are delivered to the employee. Therefore, hhgregg was not receiving a kick-back from delivered wages, and thus did not violate the regulations.

Employer Take-Away

Stein v. Hhgregg provides helpful insight for Wisconsin employers who have commissioned employees. Wisconsin employers may wish to review their policies in light of this decision and consult with legal counsel.

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